Bickering at IMF meeting signals which currencies you should target

Jack Crooks | Saturday, October 20, 2012 at 7:30 am

Maybe it’s too much to say the global financial system is coming apart at the center. But when you consider the downward trend in global trade among the key players who drive growth in the world, as shown in the chart below, you should take notice about future growth and globalization in particular.

Because if this trend picks up speed, it has the potential to offer you some very profitable trades as currencies dependent on global growth take a header.

The global trading system, by its very nature, requires cooperation among various countries to function successfully. And I don’t think it’s a stretch to say global cooperation is close to a complete breakdown. Look at what just happened at the International Monetary Fund (IMF) meeting in Tokyo:

• China boycotted the meeting. China didn’t give an official reason, but observers say it’s a result of a spat with Japan over disputed islands. What’s more, it could be a sign of things to come as an economically emboldened Beijing shows struggling Western nations it doesn’t need to play by their rules. Not exactly what you want to see from the world’s second-largest economy and morphing superpower.

• Emerging markets are ticked off at euro-zone favoritism. Brazil’s finance minister, Mr. Guido Mantaga, told the Financial Times he has had it with these meetings that concentrate on Europe only, at the expense of emerging market economies. “Currency wars will continue while the only route for escape being studied is monetary expansion,” Mantaga said.

• Fed Chairman Ben Bernanke said ‘don’t blame me.’ He said in a speech that it’s very doubtful U.S. monetary expansion has any negative impact on emerging markets (EMs), i.e. generating hot money flows. And tacitly he told EMs to stop complaining about U.S. monetary policy and start doing some stimulating of their own. This was not what EMs expected or wanted to hear.

• IMF Chief Christine Lagarde told European leaders that their austerity measures are dangerous and ineffective. Countries cannot afford to sacrifice growth at this time, no matter the longer term consequences, was effectively her message.This was a direct shot at German policy in the euro zone.

• Germany’s Finance Minister quickly defended austerity measures as the only proper course. Germany wants more austerity, and to control the process as a quid pro quo for more wealth distribution from its taxpayers.

So China and the emerging market block of countries are unhappy with IMF policies and their lack of policy control at the institution. European leaders are at odds as to how to deal with the ongoing crisis. Fed Chairman Bernanke doesn’t seem to care about what the impact of his monetary experiment is doing to the rest of the globe i.e. those who still must use the dollar as a reserve currency.

The bottom line was that policymakers spent much of their time pointing fingers at each other and delayed making any meaningful decisions until future meetings.

Leadership from the largest and most powerful economy — the United States — is required now more than ever, but seems woefully lacking.

The Currencies that Are
Bound to Plummet …

Maybe I am overplaying this. But the latest disastrous IMF meeting seems to be a symptom of much bigger problems likely to emerge should global growth continue to slow. Here is what The Guardian reported this week:

“The IMF has scaled back its global growth forecast for 2012 to 3.3% from 3.5%, and has warned that even its dimmer outlook might prove too optimistic if Europe and the United States fail to resolve their crises.”

If the world is still very much in the midst of what could be a painful rebalancing of current account surplus nations (China, Germany, and Japan for example) against current account deficit nations (the United States as the poster child here), I would suspect the slowdown in global trade will continue and likely intensify.

And if helped along by tariffs and capital controls, it could get very ugly, very fast.

The currency implications are clear …

It would be disastrous news for currencies that are leveraged to global growth. And that basket primarily includes what is commonly referred to as the commodity currencies. Examples are: The Australian dollar, New Zealand dollar, Canadian dollar, Russian ruble, and South African rand.

So this would be the basket you should consider betting against if the ugly side of global cooperation rears its head.

Best wishes,

Jack

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